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Casey Mulligan Unloads the Kitchen Sink Print
Wednesday, 17 August 2011 05:20

Casey Mulligan has been putting on a one-economist show in his NYT blog, arguing week and after week that the downturn is really a supply story and has little or nothing to do with the plunge in demand created by the collapse of the housing bubble. This week he sums up his evidence.

Most of it has to do with the fact that even in the downturn employers will hire better qualified workers over less qualified workers and lower paid workers over higher paid workers. He infers from this fact that if all workers were better qualified and/or lower paid that we would not have an unemployment problem.

This is more than a bit of a bizarre argument since it is producing evidence that does not in any way contradict anything argued by Keynes or his followers. Does anyone believe that employers stop caring about workers' qualifications in a downturn? Or, alternatively, that they stop caring about wages?

Keynes' point is that changes that could increase any individual's chance of employment (e.g. improved education or accepting lower wages) would not necessarily lead to lower unemployment in general. In other words, if all workers could instantly get a college education then the main result would be that we would have more unemployed college grads.

This story would seem to be supported by two basic facts about the downturn. First, huge numbers of people who had the skills and desire to work before the collapse of the housing bubble, now do not have jobs. It seems difficult to explain the sudden loss of millions of jobs as a supply side phenomenon. The other basic fact is that unemployment has risen across the board in every major skills grouping and geographical location. This is very hard to explain as a supply side story.

I can't imagine that any Keynesian would have thought that skills don't matter for an individual's employability nor that the wages they expect affects their likelihood of finding a job. So the evidence that Mulligan finds along these lines hardly seems much of refutation of Keynes.

Any Hope That the ECB Will Stop Adhering to Superstitions? Print
Wednesday, 17 August 2011 04:52

The NYT had a piece on the prospect that the euro zone countries might move to a closer fiscal union. The piece commented that one positive aspect to the recent growth numbers for most euro zone countries,

"was the hope that slower growth would lead to less inflation, giving the European Central Bank [ECB] more leeway to keep interest rates low and intervene in bond markets."

Of course it is also possible that sufficient evidence that the euro zone is growing way below its potential could in principle lead the euro zone to abandon its worship of 2 percent. Unlike the Federal Reserve Board, the ECB makes no pretense of targeting full employment. It has indicated a willingness to sacrifice trillions of dollars of output and leave tens of millions of workers needlessly unemployed due its exclusive focus on its 2 percent inflation target. If the banks board could be influenced by evidence then it might in principle be possible for them to alter this focus and switch to a policy designed to boost growth.

The article also peculiarly attributes the growth slowdown to the sovereign debt crisis. The more obvious explanation is the austerity programs that most countries have implemented in response to the crisis. The predicted effect of the cuts in government spending and tax increases put in place to reduce budget deficits is to slow growth. It appears that the economies of Europe are responded as expected.

NYT Notes Problem With GDP Accounts, but Gets the Solution Wrong Print
Wednesday, 17 August 2011 04:33

The NYT reported on the fact that the large revisions to GDP that the Commerce Department reported last month changed our view of the state of the recovery. (Although it is not accurate to term the 1.8 percent growth rate originally reported for the first quarter as respectable. This growth rate is not even sufficient to keep pace with the growth of the labor force.) The data are often subject to large revisions which can substantially change the assessment of the economy from the originally reported data.

However, it is wrong in arguing that the picture would be improved by relying on the income side measure of GDP. There have been two instances in which the income side measure has diverged sharply from the output side measure. One was associated with the growth and later collapse of the stock bubble in the 90s and the beginning of the 00s. Income-side GDP exceeded output side when the bubble was growing and then trailed it in the quarters following the bubble's collapse.

The second major divergence was in the middle of the last decade. We saw the exact same pattern around the growth and collapse of the housing bubble. Income-side GDP growth exceeded output side when the bubble was growing, it fell behind output growth when the bubble burst.

It seems likely that the issue here is that some of the capital gains generated by the bubbles are being misclassified as ordinary income. (Capital gains should not appear in GDP.) In fact, regression results strongly support this case.

To get this outcome, all we need is an assumption that some percentage of capital gains are always misclassified as ordinary income. When capital gains rise relative to GDP, as they do in a bubble, the amount of misclassification rises, causing income-side GDP to exceed output-side GDP. The story is reversed when the bubble bursts and capital gains plummet.

Didn't Anyone Tell the NYT About Work Sharing in Germany? Print
Tuesday, 16 August 2011 04:40

The NYT has a front page piece touting the health of the Germany economy. While the piece notes employment protections in Germany that make it difficult for employers to lay off workers, it doesn't explicit mention the country's shortwork program. This program (noted today by columnist Joe Nocera) encourages companies to reduce work hours rather than lay off workers. Largely as a result of German policies promoting short work (which go beyond the official program), the unemployment rate in Germany is now a full percentage point lower than it was at the start of the downturn.

Germany's extraordinary record on unemployment is almost entirely due to its labor market policy. Its record on growth since the start of the downturn is not especially impressive.

This article also should have used the OECD harmonized unemployment rates, which are calculated in a way similar to the U.S. measure, rather than the German government measures. While the German government measure shows an overall unemployment at 7.0 percent, the OECD measure shows German unemployment at 6.1 percent in June. Since almost no readers will be familiar with the distinction between the German government's methodology and the U.S. methodology with which they are familiar (Germany counts some part-time workers as unemployed) there is no reason not to use the OECD measure.

Good Piece On Perry and the Texas Economic Miracle Print
Monday, 15 August 2011 13:34
The NYT did a nice job outlining the issues in an assessment of the economic performance of Texas under Governor Perry. The piece is not an exhaustive (no short news story could be), but it touched the main points at issue.
Fun With Robert Samuelson Print
Monday, 15 August 2011 05:00

It's always fun to read Robert Samuelson's column on Monday morning to see what silliness he is pushing to justify cuts to Social Security and Medicare. Today he has his plan for balancing the budget over the next decade (the country's most important problem for people who never heard about unemployment).

As part of his argument for cutting benefits for the elderly Samuelson tells us that, "in 2008, the median net worth of married elderly couples was $385,000." (Actually, if we check his source, it looks like the year is 2007.)

Okay boys and girls, can anyone think of anything that might have affected the net worth of the elderly between 2007 and today? Apparently no one at the Post has noticed anything or they might have suggested that Samuelson try to use more recent data in his column.

Naturally, Samuelson doesn't suggest doing anything about the real cause of his deficit crisis story, exploding private sector health care costs. Nor does he consider any measures that might hurt the Wall Street folks that helped inflate the housing bubble that wrecked the economy. But who would expect more from Samuelson or Fox on 15th Street?

WAPO Should Make Clear, Constraints on Monetary and Fiscal Policy Are Political Print
Monday, 15 August 2011 04:47

A front page Washington Post piece was headlined, "Geithner, Bernanke Have Little in Arsenal to Fight New Crisis." This piece should have made it clear to readers that the obstacles to additional action are political not economic. All the obstacles noted in the piece are political in nature. The one possible exception is the S&P downgrade of U.S. government debt, which does not appear to be an obstacle at all. The markets laughed off this downgrade, sending U.S. bond prices soaring on the first trading day after the announcement.

A better headline for this piece would have been, "Political Obstacles Obstruct Response to Economic Crisis."

NYT Tries to Explain Why Unusually High Levels of Consumption Are Not Even Higher Print
Monday, 15 August 2011 04:20

One of the bizarre statements that is routinely repeated by people who should know better is that consumers are not spending and that is one of the reasons that the recovery has been so weak. The NYT has a piece along these lines this morning. The reason why this argument is bizarre is that consumption is still unusually high, not low.

The saving rate out of disposable income has been averaging just over 5 percent for the last 3 years. This is above the near zero rate at the peak of the housing bubble, but still well below the 8.0 percent average that households averaged for most of the post-war period prior to the growth of the stock bubble in the 90s and the housing bubble in the last decade. (Due to measurement issues, specifically capital gains showing up as income in the national income accounts, the official data likely understate the drop in savings at the peak of the bubbles and the subsequent rise since the crash.)

The predicted result of the ephemeral wealth created by these bubbles would be a surge in consumption, which implies a drop in the saving rate. Now that both bubbles have deflated we should expect the saving rate to return to normal levels or perhaps even somewhat higher as households must make up for the years when they did not save adequately.

This is one of the reasons that competent economists saw these bubbles as so dangerous. Once the economy gets on a specific growth path it is difficult to change courses. Specifically, it is not easy to find a source of demand to replace $600 billion or so in lost consumption coupled with $600 billion in lost bubble-driven construction demand.

Click for Larger Image.


Source: Bureau of Economic Analysis.

Perry's Growth Failure in Texas Print
Sunday, 14 August 2011 20:08

After getting my numbers wrong last time, I thought I would take one more look. Folks love to look at per capita GDP growth as a measure of economic progress. It's certainly not everything, but it does tell you something.

So how does Texas look under Governor Perry compared to his predecessors? Using data from the Bureau of Economic Analysis (I had to chain these two series), I get that in the years 1987-2000 per capita GDP growth averaged 2.2 percent in the U.S. as a whole. In Texas it averaged 2.8 percent, a 0.6 percentage point gap. However, in the years 2000-2010 the gap goes the other way. Per capita GDP in the U.S. as a whole grew at an average rate of 0.6 percent, while it grew at a 0.5 percent rate in Texas, a difference of 0.1 percentage point in favor of the U.S. 

Texas_growth_27052_image002Source: Bureau of Economic Analysis.

What does this say about Governor Perry's success as the steward of the Texas economy? It doesn't tell us much. There are all sorts of reasons that Texas's per capita GDP growth might have slowed relative to the rest of the country that have nothing to do with the effectiveness of Perry's policies. However, if we are looking for quick comparisons, per capita GDP growth is a common one, and it goes the wrong way for the Perry economic miracle story. 

The Post Gets It Right on the Debt Downgrade and the Stock Market Print
Sunday, 14 August 2011 16:35
The Post featured an Outlook piece by Liaquat Ahmat that made the obvious point that Standard and Poor's downgrade could not plausibly be blamed for the stock market plunge. The downgrade most immediately was an assessment of the creditworthiness of U.S. government bonds. These soared in price. The most obvious basis for the plunge in stock prices was the fear of the break-up of the euro and a financial freeze-up of the type that followed the bankruptcy of Lehman in the fall of 2008.
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.